A Guide to Instituting an Investment Policy

A well-written investment policy is not merely an option—it is a necessity—for corporate and institutional investors striving to meet critical cash objectives. Compelling an organization to put its goals and strategy in writing ensures a more consistent, rigorous approach to investing.

IN BRIEF

Please consider the following questions:

Are the liquidity features and risk characteristics of the policy’s permissible investments understood by the treasury organization, investment committee and board of directors?

When a security falls out of compliance with the investment policy, what happens? Are there procedures that outline who must be notified? What drives the decision to keep the security or sell it? Who makes the ultimate decision? If the security is kept, how is it tracked and monitored going forward?

Is portfolio duration tracked? (Interest rate duration is a measure of risk that is typically defined as the price sensitivity of the portfolio to a given change in interest rates.)

Does the organization’s reporting provide the necessary data to update financial reports and senior management on a regular basis? Are the reports timely and Financial Accounting Standards Board (FASB) and/or International Accounting Standards Board (IASB) compliant?

Is diversification among different security types addressed within the portfolio?

How are pooled investment vehicles, such as money market mutual funds, evaluated?

With markets ever changing, a well-written cash investment policy (hereinafter ‘investment policy’) is a must for corporate and institutional investors striving to meet critical cash objectives. By compelling an organization to put its goals and strategy in writing, it ensures a more consistent, disciplined approach to investing and provides a sound foundation on which to build a portfolio.

An investment policy provides important internal clarity that allows everyone — from the investment team to the board of directors — to share a common and clear understanding of the organization’s objectives and permissible investments. When markets are fluctuating an investment policy helps an organization avoid making impromptu investment decisions and focuses attention on long-term goals. It also provides financial transparency and serves as a mechanism for internal control.

"Constructing an investment policy should be a dynamic process”

Constructing an investment policy should be a dynamic process. Once implemented, it is important to regularly review and update the investment policy to ensure that it is current and provides the flexibility needed to quickly respond to changing events.

More than likely your organization already has an investment policy — 80% do.1 But it is also possible that your investment policy is not up to date with current market trends and thinking, contains vague or contradictory language, or may not reflect all market risks.

We hope you will begin implementing or updating your organization’s investment policy today. Now more than ever, an organization needs a clear investment policy to help bridge the gap between shifting market circumstances and investment goals.

J.P. Morgan Asset Management

J.P. Morgan

You should remember that past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.
All performance details on these pages are NAV to NAV with gross income reinvested.
Source: J.P. Morgan.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited which is regulated by the Financial Conduct Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l., Issued in Switzerland by J.P. Morgan (Suisse) SA, which is regulated by the Swiss Financial Market Supervisory Authority FINMA; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, all of which are regulated by the Securities and Futures Commission; in Singapore by JPMorgan Asset Management (Singapore) Limited which is regulated by the Monetary Authority of Singapore; in Japan by JPMorgan Securities Japan Limited which is regulated by the Financial Services Agency, in Australia by JPMorgan Asset Management (Australia) Limited which is regulated by the Australian Securities and Investments Commission. Accordingly this document should not be circulated or presented to persons other than to professional, institutional or wholesale investors as defined in the relevant local regulations. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.